Operationally, we started the year dealing with the significantly negative impact of the anti-smoking legislation in Chile, combined with a very flat performance in our core but mature South African businesses which were battling to grow in a persistently sluggish economy. The slower performance in South Africa had in previous years been masked by the growth of Monticello in Chile. Not so in the first half of this year – Monticello lost 22% of its revenue and 45% of its EBITDA and with South Africa only growing at 0.8%, we recorded a 5% decline in EBITDA for the first six months.
In Chile we focused aggressively on a restructure of our cost base and on building new health-compliant smoking terraces to regain lost revenues. These and other initiatives have resulted in a strong recovery in the second half, with revenues returning back to pre-smoking ban levels and a strong improvement in profit margins. In South Africa we also embarked on a significant restructure of our cost base while simultaneously implementing a number of measures to enhance revenue. These measures, which we started implementing in the first half, took a few months to gain traction and only during the second half did we start to see the benefits materialise with revenue growth of 7.4% and EBITDA growth of 15.8%.
Despite the improvement in the second half resulting in full-year EBITDA being 4.5% above the prior year, at an earnings per share level it was not sufficient to offset the poor first half, and consequently diluted adjusted headline earnings per share was 7% down on last year at 655 cents. Taking cognisance of the number of expansion projects under consideration, the dividend pay-out of 37% of diluted adjusted headline earnings was maintained.
Despite debt increasing due to expenditure on the Ocean Sun Casino in Panama, debt levels remain comfortably within our covenants with debt to EBITDA increasing from 2.2 to 2.3 times. Looking ahead, the Group has a significant number of expansion projects and acquisitions under consideration, part of which will be funded by proceeds from the SunWest/Worcester and Minor transactions, with the balance to be debt funded as explained later in this report.
AM (Anthony) LEEMING
Chief Financial Officer
The income statements below include headline earnings adjustments to reflect a comparable position with the prior year.
Six months ended 31 December |
Six months ended 30 June |
Year ended 30 June |
|||||||||
R million | 2013 | % change |
2012 | 2014 | % change |
2013 | 2014 | % change |
2013 | ||
Revenue | 5 407 | 3.6% | 5 221 | 5 418 | 7.4% | 5 046 | 10 825 | 5.4% | 10 267 | ||
Casino | 4 221 | 0.3% | 4 208 | 4 248 | 6.5% | 3 987 | 8 469 | 3.3% | 8 195 | ||
Rooms | 558 | 25.7% | 444 | 556 | 8.4% | 513 | 1 114 | 16.4% | 957 | ||
Food, beverage and other | 628 | 10.4% | 569 | 614 | 12.5% | 546 | 1 242 | 11.4% | 1 115 | ||
Direct costs | (2 426) | (4.7%) | (2 317) | (2 403) | (5.0%) | (2 288) | (4 829) | (4.9%) | (4 605) | ||
Casino | (1 700) | (0.4%) | (1 694) | (1 681) | (3.7%) | (1 621) | (3 381) | (2.0%) | (3 315) | ||
Rooms | (174) | (26.1%) | (138) | (185) | (11.4%) | (166) | (359) | (18.1%) | (304) | ||
Food, beverage and other | (552) | (13.8%) | (485) | (537) | (7.2%) | (501) | (1 089) | (10.4%) | (986) | ||
Gross profit | 2 981 | 2.7% | 2 904 | 3 015 | 9.3% | 2 758 | 5 996 | 5.9% | 5 662 | ||
Indirect costs | (1 492) | (11.8%) | (1 334) | (1 452) | (3.1%) | (1 408) | (2 944) | (7.4%) | (2 742) | ||
EBITDA | 1 489 | (5.2%) | 1 570 | 1 563 | 15.8% | 1 350 | 3 052 | 4.5% | 2 920 | ||
Depreciation and amortisation | (464) | (12.6%) | (412) | (494) | (12.5%) | (439) | (958) | (12.6%) | (851) | ||
Property and equipment rentals | (73) | (102.8%) | (36) | (75) | (10.3%) | (68) | (148) | (42.3%) | (104) | ||
Profit from operations | 952 | (15.2%) | 1 122 | 994 | 17.9% | 843 | 1 946 | (1.0%) | 1 965 | ||
Foreign exchange profits | – | (100.0%) | 8 | (1) | (110.0%) | 10 | (1) | (105.6%) | 18 | ||
Net interest paid | (239) | (4.8%) | (228) | (241) | (17.6%) | (205) | (480) | (10.9%) | (433) | ||
Profit before tax | 713 | (21.0%) | 902 | 752 | 16.0% | 648 | 1 465 | (5.5%) | 1 550 | ||
Tax | (255) | 15.6% | (302) | (224) | (29.5%) | (173) | (479) | (0.8%) | (475) | ||
Minorities | (110) | 37.9% | (177) | (193) | (14.9%) | (168) | (303) | 12.2% | (345) | ||
Adjusted headline earnings | 348 | (17.7%) | 423 | 335 | 9.1% | 307 | 683 | (6.4%) | 730 |
Indirect costs, which included a full year’s trading of both the Maslow and Boardwalk hotels, increased by 7.4%. Depreciation and amortisation increased by 12.6% due to additional depreciation charges from the new property openings (Boardwalk and Maslow hotels) and the implementation of the Group’s Enterprise Gaming System (EGS). Property and equipment rentals increased due to higher variable rentals on the Maslow and Table Bay properties.
The Group incurred a R1 million foreign exchange loss compared to a gain of R18 million in the prior year. Net interest paid of R480 million was 10.9% ahead of last year due to no longer capitalising interest on the Boardwalk and Maslow developments, higher average debt as a result of these developments and higher local interest rates.
The tax charge of R479 million was marginally up on last year largely due to a one-off foreign tax credit in the prior year relating to investment allowances in Nigeria and the reversal of an overprovision. The effective tax rate, excluding non-deductible preference share dividends and withholding taxes, was 32% (2013: 30%).
The Group incurred a number of expense and income items that have been classified as headline earnings and adjusted headline earnings adjustments, the most significant of which are as follows:
To give investors a better understanding of the costs included in the statutory statement of comprehensive income, the table below sets out the costs including adjusted headline earnings adjustments, split between the first and second half:
Six months ended 31 December |
Six months ended 30 June |
Year ended 30 June |
|||||||||
R million | 2013 | % change |
2012 | 2014 | % change |
2013 | 2014 | % change |
2013 | ||
Consumables and services | 604 | 9.6% | 551 | 601 | 3.8% | 579 | 1 205 | 6.6% | 1 130 | ||
Depreciation and amortisation | 464 | 12.6% | 412 | 494 | 12.5% | 439 | 958 | 12.6% | 851 | ||
Employee costs | 1 206 | 9.6% | 1 100 | 1 171 | (1.3%) | 1 187 | 2 377 | 3.9% | 2 287 | ||
Levies and VAT on casino revenue | 992 | 0.3% | 989 | 1 011 | 8.9% | 928 | 2 003 | 4.5% | 1 917 | ||
Promotional and marketing costs | 391 | 0.5% | 389 | 326 | (0.6%) | 328 | 717 | – | 717 | ||
Property and equipment rentals | 73 | 108.6% | 35 | 75 | 8.7% | 69 | 148 | 42.3% | 104 | ||
Property costs | 291 | 11.5% | 261 | 286 | 2.1% | 280 | 577 | 6.7% | 541 | ||
Other operational costs | 434 | 19.9% | 362 | 460 | 17.0% | 393 | 894 | 18.4% | 755 | ||
Total expenses | 4 455 | 8.7% | 4 099 | 4 424 | 5.3% | 4 203 | 8 879 | 7.0% | 8 302 |
The focus on cost containment is clearly highlighted in the previous table, in particular employee costs which were down 1.3% in the second half and promotional and marketing costs which were kept in line with the prior year. The increase in other operating costs is attributable to higher IT costs (relating to the implementation of the Group’s EGS and software licence increases due to the weaker Rand), significant increases in rates and taxes, increased corporate social investment and socioeconomic development contributions and a full year’s trading at both the Boardwalk and Maslow hotels.
Revenue | EBITDA | EBITDA margin | ||||||||
R million | 2014 | % change |
2013 | 2014 | % change |
2013 | 2014 | 2013 | ||
South Africa | 8 266 | 6.1% | 7 788 | 2 334 | 6.0% | 2 201 | 28.2% | 28.3% | ||
Other Africa | 1 071 | 13.0% | 948 | 195 | 12.7% | 173 | 18.2% | 18.2% | ||
Monticello | 1 443 | (3.7%) | 1 498 | 303 | (5.0%) | 318 | 21.0% | 21.2% | ||
Management activities | 612 | 6.3% | 610 | 248 | 1.2% | 245 | 40.5% | 40.2% | ||
Total operating segments | 11 392 | 5.1% | 10 844 | 3 080 | 4.8% | 2 937 | 27.0% | 27.1% | ||
Central office and other eliminations | (567) | 1.7% | (577) | (28) | (54.7%) | (17) | 4.9% | 2.9% | ||
10 825 | 5.4% | 10 267 | 3 052 | 4.5% | 2 920 | 28.2% | 28.4% |
The South African performance is heavily distorted by Sun City, which is a high revenue/low margin operation. Excluding Sun City from the South African numbers, the EBITDA margin for the rest of the South African business increases to 31.4% and including the management company the margin increases to above 34%. Margins in Chile are impacted by the higher levels of gaming taxes/levies, which are around 11% higher than in South Africa.
Revenue by region and nature is set out below:
Gaming | Rooms | F & B and other | Total | ||||||||||||
R million | 2014 | % change |
2013 | 2014 | % change |
2013 | 2014 | % change |
2013 | 2014 | % change |
2013 | |||
South Africa* | 6 738 | 4% | 6 457 | 764 | 17% | 652 | 809 | 14% | 712 | 8 311 | 6% | 7 821 | |||
First half | 3 371 | 3% | 3 286 | 379 | 30% | 292 | 406 | 13% | 360 | 4 156 | 6% | 3 938 | |||
Second half | 3 367 | 6% | 3 171 | 385 | 7% | 360 | 403 | 14% | 352 | 4 155 | 7% | 3 883 | |||
Other African | 428 | 11% | 385 | 342 | 13% | 303 | 301 | 16% | 260 | 1 071 | 13% | 948 | |||
First half | 222 | 15% | 193 | 175 | 15% | 152 | 152 | 16% | 131 | 549 | 15% | 476 | |||
Second half | 206 | 7% | 192 | 167 | 11% | 151 | 149 | 16% | 129 | 522 | 11% | 472 | |||
Monticello | 1 303 | (4%) | 1 353 | 8 | 300% | 2 | 132 | (8%) | 143 | 1 443 | (4%) | 1 498 | |||
First half | 628 | (14%) | 729 | 4 | – | – | 70 | (10%) | 78 | 702 | (13%) | 807 | |||
Second half | 675 | 8% | 624 | 4 | 100% | 2 | 62 | (5%) | 65 | 741 | 7% | 691 | |||
8 469 | 3% | 8 195 | 1 114 | 16% | 957 | 1 242 | 11% | 1 115 | 10 825 | 5% | 10 267 |
* Includes management activities and central office and other eliminations.
The improvement in gaming revenue growth in the second half of the year in South Africa and Monticello is clearly demonstrated in the table above. Monticello has continued to recover from the smoking ban instituted in March 2013 and on a like-for-like basis (March to June) gaming revenues in Chilean Pesos are up 23% on last year and 2.4% below revenue levels in the pre-smoking ban era.
Rooms’ revenue grew strongly, with the first half assisted by the opening of the Boardwalk and Maslow hotels in December 2012 and January 2013 respectively. On a comparative basis rooms’ revenue was up 10% for the year. Key properties’ occupancies and average daily rates (ADRs) are set out below:
Occupancy | ADR | ||||
2014 | 2013 | 2014 | 2013 | ||
Sun City | 64.3% | 63.6% | R1 639 | R1 616 | |
Wild Coast Sun* | 80.6% | 78.3% | R445 | R647 | |
The Table Bay Hotel | 68.3% | 53.0% | R2 121 | R2 086 | |
The Maslow | 56.0% | 36.3% | R1 098 | R1 130 | |
Royal Livingstone and Zambezi Sun | 43.1% | 39.8% | R1 965 | R1 827 | |
Gaborone Sun | 71.6% | 77.4% | R889 | R792 | |
The Federal Palace | 63.8% | 67.6% | R2 486 | R2 142 |
* The Wild Coast ADR is well below last year due to a significant increase in discounted gaming room nights.
GrandWest revenue was 8% ahead of last year at R2 020 million. EBITDA however increased by only 6% due to a 2% increase (an additional R26 million) in gaming levies with effect from 1 September 2013, which were increased in lieu of GrandWest’s ongoing exclusivity. Cost savings helped offset the increase in levies and as a result the EBITDA margin only declined 1.0% to 41.2%.
Sun City revenue at R1 403 million and EBITDA at R176 million were up 9% on last year. The current year included R12 million sales costs relating to the refurbished phase 1 Vacation Club units. If excluded, EBITDA would have been up 16%. Although costs are recognised when incurred, the revenue from the sale of Vacation Club units (R105 million achieved to date) is deferred and will be recognised over the ten year contract period. The casino has shown a strong improvement with revenue up 16% to R519 million. Rooms’ revenue was only up 1% at R434 million due to weak local demand.
Sibaya revenue was 5% up at R1 095 million and through excellent cost containment EBITDA increased by 10% to R398 million, despite an increase in gaming levies in November 2012 which resulted in an additional cost of R4.1 million. The EBITDA margin improved by 1.6% to 36.3%. Sibaya’s 35.9% share of the KwaZulu Natal gaming market was 0.6% higher than last year.
Carnival City revenue declined 2% for the year to R1 042 million. While Carnival City continues to be impacted by increased competition from electronic bingo terminals (EBTs) and limited payout machines (LPMs) it has refocused its marketing efforts and is starting to gain market share which in the second half of the year increased 1% to 15.0%. EBITDA was down 1% for the year, despite a strong second half in which revenues increased by 3% and, due to cost savings, EBITDA for the second half of the year improved by 10%.
Boardwalk revenue increased 12% to R554 million, with casino revenue up 8% to R512 million. The property is starting to benefit from the new hotel but its gaming business is going to face competition in the future from EBT operations that have opened and will be opening in its catchment area. Through excellent cost control the Boardwalk increased EBITDA 18% and the EBITDA margin 1.7% to 30.3%.
In the Group’s hotel operations, The Table Bay hotel achieved excellent revenue growth with revenues up 29% to R233 million driven by a 40% increase in international room nights sold which accounted for 73% of rooms’ revenue. EBITDA was up 127% to R50 million (2013: R22 million) with the EBITDA margin improving 9.3% to 21.5%.
The recently opened Maslow has established itself in the Johannesburg corporate market and managed to achieve a profit before rentals and depreciation. The high rental charge due to straight lining accounting over the period of the lease results in an operating loss.
The Royal Livingstone and Zambezi Sun’s revenue in local currency was up 15% with EBITDA up 21%. In Rand, revenue at R222 million and EBITDA at R52 million were up 22% and 27% respectively. The improvement in revenue is due to an increase in conferences and events hosted at the properties.
The Federal Palace experienced a decline in hospitality revenues due to the opening of two 180 room five star hotels in Lagos and the continued turmoil in the country. Gaming revenue was maintained in line with the prior year in local currency. EBITDA declined 40% in local currency to NGN421 million (R28 million). The outbreak of the Ebola virus in West Africa is likely to impact trading at the Federal Palace in the year ahead.
Monticello has been dealing with the severely negative impact of anti-smoking legislation which caused revenue at the half year to be down 22%. Due to corrective action taken, casino revenue was up 10% in the second half. This recovery in revenue is partly due to customers getting used to the new laws but primarily due to the construction and opening of four new smoking decks in September and October 2013. Overall revenue for the year was down 8% on the previous year at CLP74.2 billion but despite the significant drop in revenue the reduction in EBITDA for the year was contained to 8.8% (CLP15.7 billion). The recovery in revenues in recent months and a comprehensive restructure of the business resulted in EBITDA in the second half of the year increasing by 56% to CLP9.5 billion on the previous year at an EBITDA margin of 24.8%, which bodes well for the year ahead.
R million | 2014 | % change |
2013 |
Revenue | |||
Sun International Management Limited (SIML) | 573 | 5% | 547 |
Management fees and licence fees | 568 | 536 | |
Project fees | 5 | 11 | |
Manco | 39 | (38%) | 63 |
612 | 0% | 610 | |
EBITDA | |||
SIML | 218 | 11% | 196 |
Manco | 30 | (39%) | 49 |
248 | 1% | 245 |
Management fees and related income at R612 million were in line with last year, with EBITDA up 1% at R248 million. Non-recurring project fees for 2013 included R7 million at Boardwalk. Manco revenue and EBITDA in the prior year included R24 million of revenue and R19 million of EBITDA relating to the Afrisun Gauteng and Teemane Manco contracts which were cancelled in the prior year as part of an initiative to simplify the Group structure.
The Group’s borrowings at 30 June 2014 of R7.6 billion are R663 million above last year. The increase is primarily due to the Ocean Sun Casino development in Panama (R719 million) as well as the raising of R120 million preference funding to acquire the remaining 23.2% interest in Afrisun Leisure not already owned, partly offset by strong cash flows generated by operations.
Set out in the next table is a summary of the Group’s net debt position and debt covenants:
2014 | 2013 | ||
Long-term debt | 3 772 | 3 753 | |
Short-term debt | 3 810 | 3 166 | |
Less Dinokana debt | (511) | (488) | |
Less cash (excluding cash floats) | (834) | (841) | |
Net debt | 6 237 | 5 590 | |
Debt covenant |
2014 | 2013 | |
Debt ratios | |||
Debt to EBITDA | <3.0 | 2.3 | 2.2 |
Net debt to EBITDA | 2.0 | 1.9 | |
EBITDA to interest | >3.0 | 6.1 | 6.4 |
Additional debt capacity | 2 085 | 2 329 |
The marginal increase in debt ratios is due to the funding of the Ocean Sun Casino in Panama which only opened on 12 September 2014 and consequently generated no EBITDA in the period under review. The debt ratios remain well within the debt covenant ratios agreed with the banks. At the 3 times debt to EBITDA cover level we have R2.1 billion in additional debt capacity based on 2014 EBITDA.
The Group has announced a number of transactions and developments over the past year including the acquisition of a further 54.7% interest in Monticello and a 25% interest in GPI Slots, the US$105 million investment in its Ocean Sun Casino in Panama and the soon-to-commence development of a casino in Cartagena, Colombia at a cost of US$30 million. The transactions and developments will be funded out of new debt facilities, cash on hand and the proceeds from the Minor and SunWest/Worcester transactions (described in further detail here).
The net funding requirement is set out below:
Rm | |
Completion of Ocean Sun Casino | 463 |
Colombia | 315 |
Monticello (net of cash) | 1 381 |
GPI Slots | 280 |
2 439 | |
SunWest and Worcester 14.9% disposal | (635) |
Minor transaction | (664) |
1 140 |
The net funding is well within the Group’s current debt capacity. The funding of the Menlyn Maine development (discussed further here) will only likely ramp up to any significant levels in the 2017 financial year and consequently will be considered nearer the time.
Given the strong cash generation of the Group, we are comfortable with the current and anticipated financial gearing and at the current debt to EBITDA levels the Group has sufficient capacity to fund the projects under consideration.
Rm | |
Expansionary | |
Ocean Sun Casino | 672 |
672 | |
Refurbishment | |
Sun City | 179 |
Zambia (Royal Livingstone) | 14 |
Table Bay | 9 |
202 | |
Ongoing asset replacement | 878 |
IT | 126 |
Slots | 325 |
Other | 427 |
Enterprise Gaming System | 268 |
Enterprise Resource Planning | 63 |
Total capital expenditure | 2 083 |
The table below sets out the capital expenditure on major projects and the expected timing thereof:
Forecast | ||||
R million | Total | Spend to date | 30 June 2015 | 30 June 2016 |
Ocean Sun Casino | 1 135 | 672 | 463 | – |
Colombia | 317 | – | 317 | – |
Sun City Vacation Club | 300 | 179 | 121 | – |
Sun City Casino | 50 | – | 50 | – |
Sun City Cabanas | 100 | – | 40 | 60 |
Table Bay | 9 | 9 | – | – |
Zambia | 147 | 14 | 133 | – |
2 058 | 874 | 1 124 | 60 | |
Other minor refurbishments | 185 | – | 185 | – |
Enterprise Gaming System | 647 | 501 | 146 | – |
Enterprise Resource Planning System | 157 | 67 | 63 | 27 |
3 047 | 1 442 | 1 518 | 87 |
Ongoing asset replacement forecast for 2015:
IT | 157 |
Slots | 202 |
Other | 444 |
803 |
Free cash flow generated by the Group was as follows:
R million | 2014 | % |
2013 |
Cash retained from operating activities | 2 555 | 2 462 | |
Interest paid | (480) | (433) | |
Replacement of PPE and computer software | (1 390) | (743) | |
685 | (47%) | 1 286 | |
Dividends paid | |||
Minorities | (249) | (273) | |
Shareholders | (240) | (252) | |
196 | 761 |
Although cash retained from operations was up on last year, free cash flow declined to R196 million as a result of an increase in maintenance expenditure, Sun City Vacation Club refurbishment and the implementation of EGS and the Enterprise Resource Planning (ERP) system. The increased capital expenditure was in line with indications given to shareholders in 2013.